Overview

States can require digital businesses to collect and remit state taxes when the business has “nexus” — a sufficient connection to the state under that state’s laws and court rulings. Nexus is not one-size-fits-all: it differs for sales tax, income tax, and other state levies, and states use different tests and thresholds. The 2018 U.S. Supreme Court decision in South Dakota v. Wayfair fundamentally shifted the rules for sales tax, allowing states to assert economic nexus based on remote sales rather than just physical presence (South Dakota v. Wayfair, 2018).

In my practice advising digital firms over 15 years, I’ve seen two common patterns: (1) startups underestimate how quickly economic nexus thresholds are met when they scale beyond their home state; and (2) mature companies assume taxability of a product is universal when states vary widely on whether they tax SaaS and other digital services.

The rest of this guide explains the nexus types that matter to digital businesses, how states differ, practical compliance steps, common pitfalls, and where to go for authoritative guidance.

Types of nexus that affect digital businesses

  • Physical presence nexus

  • Traditional standard: offices, stores, warehouses, employees or contractors performing services in the state. Physical presence generally creates both sales and income tax nexus (state rules vary).

  • Economic nexus (sales-based)

  • Triggered by sales volume or number of transactions into a state. Many states adopted thresholds modeled on South Dakota’s law (for example, $100,000 in sales or 200 transactions), but thresholds vary and some states use higher or lower limits. After Wayfair, economic nexus is the dominant test for remote sellers (see South Dakota v. Wayfair, 2018).

  • Click-through or affiliate nexus

  • If in-state affiliates or referral arrangements generate sales (for example, affiliate websites or referral partners receiving commissions), some states treat that activity as creating nexus for the seller.

  • Marketplace facilitator rules

  • Many states require online marketplaces (Amazon, Etsy, etc.) to collect and remit sales tax on behalf of third-party sellers. Marketplace facilitator rules change who is responsible for collection and can eliminate registration burdens for some sellers, but you must confirm whether your platform reports and pays tax for transactions.

  • Employee/remote worker nexus

  • Having remote employees or contractors in a state can create payroll, income, or corporate filing requirements. See our guide on Remote Worker Nexus for compliance steps (Remote Worker Nexus: Complying with Multi-State Tax Rules).

  • Income tax nexus

  • Separate from sales tax, states use different standards (doing business tests, payroll, property, and sales factors) to determine corporate or personal income tax nexus. You can have income tax obligations without sales tax obligations and vice versa.

How states treat digital goods and services

Taxability of digital products (music, ebooks, streaming), SaaS (software-as-a-service), and professional services varies by state. Some states tax SaaS and streaming as taxable services or tangible personal property; others exempt or partially exempt them. There is no federal rule that standardizes treatment across states, so a SaaS vendor may collect sales tax in State A but not in State B.

States’ taxability rules are set by state statutes, revenue department guidance, and sometimes court rulings. The Streamlined Sales and Use Tax Agreement (SSUTA) provides model rules for members but only covers participating states and mainly targets goods and certain services (Streamlined Sales Tax Governing Board).

For a targeted discussion of when SaaS triggers nexus and sales tax, see our article on State Tax Nexus Considerations for SaaS and Digital Service Providers (State Tax Nexus Considerations for SaaS and Digital Service Providers).

Examples to make it concrete

  • Example 1 — Economic nexus: A small online education platform sells subscriptions nationwide. In Year 2 it records $125,000 of in-state sales to customers in California. If California’s economic nexus threshold is met by that sales figure (and the product is taxable there), the platform must register for a California seller’s permit and begin collecting sales tax.

  • Example 2 — Marketplace facilitator: A craft seller uses an online marketplace that collects and remits sales tax for all orders. The marketplace’s remittance may relieve the seller from registration and collection duties in many states, but the seller should obtain transaction-level reports from the marketplace and confirm whether the marketplace is collecting in every state where the seller has exposure.

  • Example 3 — Remote employee: A marketing firm with an employee working remotely from Texas may face Texas franchise tax or withholding requirements even if the company has no office in Texas. Check the state’s remote worker nexus guidance.

Practical compliance steps (priority checklist)

  1. Map where your customers and revenue come from. Export transaction-level data monthly to spot states where sales approach common economic thresholds.

  2. Determine product taxability state-by-state. A product’s taxability can differ dramatically—classify each SKU or service and check state guidance.

  3. Review contracts and affiliate arrangements. If you pay commissions to in-state partners, you may create click-through or affiliate nexus.

  4. Confirm marketplace facilitator reporting. Obtain written confirmation and transaction reports from marketplaces to avoid duplicate remittances or missed filings.

  5. Register proactively (where required). Voluntary, timely registration often lowers audit risk and avoids penalties; some states offer simplified collections for new registrants.

  6. Consider a voluntary disclosure agreement (VDA) if you discover past noncompliance. VDAs can limit lookback periods and penalties but terms vary by state.

  7. Use automation. Tax engines and accounting integrations reduce manual errors and automatically apply nexus and taxability rules as you scale.

  8. Document everything. Keep sales reports, product taxability analyses, marketplace statements, and registration confirmations for at least 4–7 years depending on state audit windows.

Audit risks and how states detect nexus

States compare reported in-state consumption, third-party marketplace data, and payment processor records. The growth of information-sharing agreements and data-matching tools has increased states’ ability to identify remote sellers. If a state opens an audit, be ready to show registration history, collected taxes, transaction logs, and nexus analyses for disputed periods.

Common mistakes digital businesses make

  • Assuming digital = nontaxable. Taxability varies and many states now tax digital goods and SaaS.
  • Waiting too long to register. Missed registrations can trigger back taxes, interest, and penalties.
  • Relying solely on marketplaces without verifying coverage. Some marketplaces exempt sellers from registration only for the states where the marketplace collects tax.
  • Ignoring income tax nexus. Sales tax compliance alone doesn’t satisfy corporate or withholding rules.

Tools, resources, and where to check

  • State revenue department websites: authoritative answers on taxability and registration.
  • South Dakota v. Wayfair, 585 U.S. ___ (2018): the Supreme Court decision that enabled economic nexus rules.
  • Streamlined Sales Tax Governing Board: guidance on SSUTA members and simplified rules (https://www.streamlinedsalestax.org/).
  • IRS: general federal guidance and links to state contacts (https://www.irs.gov).

For a practical walkthrough of sales-tax registration and recurring compliance tasks, our step-by-step checklist explains registration, filing cadence, and remittance practices (State Sales Tax Nexus for Remote Sellers: Practical Steps to Register and Comply).

For issues about marketplaces and platform obligations, see our overview on how nexus rules affect marketplaces and online sellers (How State Nexus Rules Affect Online Sellers and Marketplaces).

Professional tips from practice

  • Treat nexus monitoring as an operational KPI. Set automated alerts when sales to any state approach common thresholds.
  • Maintain a taxability matrix for each product and service line — update this at least quarterly when you release new features or bundles.
  • If you get a notice from a state, respond quickly. Early engagement can limit scope, and many states will negotiate payment plans or limited lookback periods.

In my experience, early registration buys credibility with tax authorities and often reduces enforcement intensity.

Frequently asked questions (short answers)

Q: Can I remove nexus once established?
A: Nexus based on historical physical presence or past economic activity isn’t “dissolved” retroactively. You can reduce future obligations by changing business practices (e.g., stopping in-state activity), but obligations for periods when nexus existed remain.

Q: Are sale thresholds the same in every state?
A: No. Thresholds vary. Many states follow the $100,000/200-transaction model, but check each state’s statute or revenue guidance.

Q: Does a marketplace facilitator always relieve my registration duty?
A: Not always. Some states require marketplace collection for sales but still expect sellers to register for other tax types or to report sales.

Disclaimer

This article is educational and does not constitute legal or tax advice. For a tailored assessment, consult a CPA or state tax attorney familiar with multistate digital-economy issues. Authoritative sources include state revenue departments and the U.S. Supreme Court decision in South Dakota v. Wayfair (2018). Financial and tax laws change—confirm rules with state guidance and your tax advisor.

Further reading

(Selected references: South Dakota v. Wayfair, 2018; Streamlined Sales and Use Tax Agreement; state revenue department guidance; IRS.)